Best Removes Brit Insurance from Under Review; Affirms Ratings

A.M. Best Europe – Rating Services Limited has removed from under review with negative implications and affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of UK-based Brit Insurance Limited (BIL).

Best also removed from under review with negative implications and affirmed the ICR of “bbb” of the Netherlands-based Brit Insurance Holdings N.V. (BIHNV), the ultimate parent of the Brit Insurance group of companies, and the debt rating of “bbb-” on the £135 million [$223 million] fixed rate subordinated notes, issued and guaranteed by BIL’s intermediate holding company, UK-based Brit Insurance Holdings Ltd., and now an obligation of BIHNV. The outlook assigned to all of the ratings is stable.

Best explained that it had placed the ratings of BIL and BIHNV under review with negative implications following the announcement of a recommended cash offer for BIHNV by Achilles Netherlands Holding B.V., a company which is majority owned by funds managed by Apollo Management VII, L.P. and funds advised by CVC Capital Partners Limited. The offer was declared wholly unconditional on March 9, 2011.

Best said its “concerns regarding the post-acquisition capital structure of BIHNV and the potential for Achilles to establish a strategy of maintaining lower consolidated risk-adjusted capitalization at BIHNV have been alleviated following discussions with BIHNV’s management team and representatives of Achilles. The rating affirmations and stable outlook reflect Best’s expectation that risk-adjusted capitalization will remain strong both on a stand-alone basis at BIL and on a consolidated basis at BIHNV. Financial and debt leverage ratios are expected to remain within A.M. Best’s tolerance levels.”

Best also indicated that BIL is expected to report a small pre-tax loss in 2011, taking into account exposure to the large loss events in the first quarter of the year, principally the Australian floods and earthquakes in New Zealand and Japan.

In addition Best expects a further reduction in premium income “as management responds to the weak market conditions affecting its main lines of business. Lower premium income contributed to an increase in BIL’s expense ratio in 2010.” Best said it would continue to “monitor the impact of management initiatives to control costs across the group.”

Best also, indicated that the “weak performance of the UK business unit remains a negative rating factor. Actions taken by management to improve the profitability of this business, including the withdrawal from certain lines of business, are expected to support a reduction in BIL’s attritional loss ratio in 2011. However, prior year reserve surpluses, which have supported technical performance in recent years, are likely to be lower.”

In conclusion Best pointed out that BIL “has a good market profile, which benefits from the Brit Insurance brand in the London market.” Best is nonetheless “concerned that strong competition from insurers that benefit from highly efficient distribution and better economies of scale will constrain the company’s ability to operate profitably in the UK market. Business written through the group’s UK business unit represents approximately 60 percent of BIL’s gross written premiums and largely comprises small to medium-sized commercial and personal lines risks. The balance of the account is written through the global markets and reinsurance business units.”

Source: A.M. Best